Role of Insurance in Economic Development and Advantages of Life Insurance
Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. All good life insurance companies have huge funds, accumulated through the small amounts of premium of individuals.
These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insurers in India are new and have accumulated funds equal to about one-eighth of the LIC of India. But even their investments in the various sectors and contribution to the country’s economic development, would be of similar proportions.
A life insurance company’s funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policyholders.
The management of life insurance companies are required to make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the L.I.C, benefit the society at large.
Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes by a terrible fire.
Advantages of Life Insurance
Life insurance has no competition from any other business. Many people think that life insurance is a means of savings. When a person saves, the amount of funds available at any time is equal to the amount of money set aside in the past plus interest. This is so in a fixed deposit in the bank, in national savings certificates, in mutual funds and all other savings instruments.
If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amount invested plus appreciation. In life insurance, however, the fund available is not the total of the savings already made, but the amount one wished to have at the end of the savings period.
The final fund is secured from the very beginning. One is paying for it over the years, out of the savings. One has to pay for it only as long as one lives or for a lesser period, if so chosen. The assured fund is not affected. There is no other scheme which provides this kind of benefit.
Therefore life insurance has no substitute. Life insurance provides advantages as;
(i) In the event of death, the heirs can collect the money quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund, etc.;
(ii) There is a certain amount of compulsion to go though the plan of savings;
(iii) Creditors cannot claim the life insurance money. They can be protected against attachments by Courts.;
(iv) There are tax benefits, both in income tax and in capital gains ;
(v) Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy;
(vi) It is possible to protect a life insurance policy from being attached by debtors. The beneficiaries' interests will remain secured;
(vii) Life insurance is the best possible way for family protection;
(viii) Insurance is the only way to safeguard against the unpredictable and unavoidable risks of the future;
(ix) The value of human life is far greater than the value of property. Only insurance can preserve it. ;
(x) Life insurance is better than any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. ;
(xi) Life insurance enhances the existing standards of living. Life insurance helps people live financially solvent lives and (xii) Life insurance perpetuates life, liberty and the pursuit of happiness.